Real estate investing is all about perception—your perception of where the market is going and where it’s going. The aim, as always, is to buy low and sell high.
You want to buy a cheap tract of dirt and sell it as a high-priced piece of developed real estate after it’s appreciated enough to turn a tidy profit. Selling the property is an art in and of itself.
Buying an initial tract of dirt lends itself to some solid, rational guidelines:
First, look at trend lines for housing prices in your area. While most housing markets are in decline (and the housing markets in Florida and California are adjusting from over a decade of over-valuation), there are markets where housing prices are rising. This is a decent leading indicator that there’s a market for expansion.
Second, look for job-related news. Home purchases require a steady source of income. New employers moving into a city or a government branch office are a strong indicator that good, well-paying jobs will likely come up. Where well-paying jobs roost, home purchases follow.
Related to this, talk to your local city planning office. Are there recent “right of ways” purchases to lay down sewer lines? Is the local telephone cable planning to run out of fiber optic lines – a “must have” trend in new home construction? These things point to areas where home growth is imminent. Other big tip-offs are school bond issues (found in your local newspaper) and opening new parks.
Before you look at the land, check out the adjacent commercial real estate usage. Look for “family-friendly” or “residential friendly” commercial properties: Houses close to grocery and clothes shopping tend to fetch a higher price than those farther away. If there’s a movie theater nearby or plans for an elementary or middle school, a factor that into the size of the homes you build and what their amenities will be; buyers are looking for those features are looking for “mover upper” homes – with a bit more floor space, and two (or three) bedrooms for the kids. Anchor stores like Wal-Mart and Best Buy are other spots to look for. These companies spend millions on surveys of purchasing patterns before buying a store location; if they’re buying a plot of land, you’ve got about a year to a year and a half window to look into nearby real estate for single-family residential and rental residential properties.
You can even flip this on its side – if you can talk to a group of commercial real estate investors, building a shopping center as the home-development nucleus is also a viable combined strategy. This also applies to highly urban areas. Many downtown areas businesses have abandoned can be converted into apartment buildings. Some older housing projects are being torn down for mixed-use spaces with combined commercial and residential areas. In particular, you can often get block grants to help finance projects like this, and there are programs from HUD that can help out a great deal with “urban renovations.”
Another source to investigate is the demographics in your area. Look at the US Census figures (and local county figures) for median age and birth rate per capita. You want to invest in areas where the population is growing already. High skews in the ’40s and ’50s indicate that you’ve got a bunch of people who are going to retire soon, and retirees are highly prone to selling properties off. Most of the urban parts of California and great swaths of the rural Midwest are places to observe. Demographic trends have changed entire towns since the 1950s as the country’s population has shifted to urban areas.
If there’s a local planning council or urban development council, make it a point to get the minutes of all the meetings from the past year. The city council offices will have them on file as a matter of public record. Also, try to get into the following range of meetings as an observer. Please discuss with the city and county managers where they see housing and construction trends moving. What you’re looking for is real estate that will be desirable in two to three years; look at road planning atlases, and look for all the data you can find. Also, look for real estate that will be scenic – lakefront property is as close to a guaranteed bet as you can get in real estate investing, mainly if there’s a lake that’s at the “far end” of a development axis. Likewise, if there’s land that the city council is looking to acquire for parks, buying the adjacent lots now means you’ll be able to sell them later.
Lastly, talk to the professionals in your communities. Talk to architects who can tell you if they’re busy or not. Maintain professional contacts with engineers, bankers, and attorneys. They will usually know about projects well before the general public. Also, make a habit of reading the local newspaper’s business section. The first clue that a business may move into your area is often buried at the bottom of a column on page 8.
The guidelines suggested above will help you find “sleeper” raw land properties. These “sleeper” properties are perfect for the buy low, sell high strategy used by successful commercial real estate investors.